This weekend I was speaking with a young trader and a question about research inevitably came up.
“What research are you working on to maintain your edge in the markets?”
My answer: Following your system is exponentially more important than researching new trading tactics.
Progress from research typically occurs by accident often following dramatic emotional experiences trading the markets. But this “progress” really isn’t progress at all.
What generally happens is you wind up tweaking your system a bit to manage risk differently to your new preference. Or you notice that you missed out on some opportunity that was off your radar and you figure out a new method to not let that happen again.
Profitable long-term trading is mostly mundane and doesn’t need constant tweaking. It’s about chopping wood and carrying water. Doing the daily chores to ensure the operation continues running. It’s work. Research breakthroughs do occur, but they’re rare and you mostly cycle in and out of these enlightening and exciting periods.
Similar to storms, you don’t learn how to better protect your house on sunny windless days. You can only learn when presented with nasty weather. Same goes for the markets.
Another thing on “breakthroughs”: the new “edge” that you sometimes find is often short-lived. The markets typically find the same advantage you did and arbitrage it away pretty quickly.
The breakthroughs I’ve discovered reside on the long end of the spectrum. They are profiting from the things that never change — human emotion, overestimating, mistakes and random events (to name a few). These are the elements that move markets over time. They create trends and sustainable opportunity.
That’s what I told this young trader to focus on — to love lacing up your boots to do the mundane work. To master the basic principles of sound trading. Not to get caught up in the romantic Odyssey for shiny and sparkly things.
Anyway, back to work.